Avoiding Arbitration

Deep inside many contracts these days lurks a clause that can enormously affect your rights. It usually goes something like this:

In the event of a dispute between the Contractor and the Contractee concerning the performance of any of the terms of this Agreement, or the interpretation of this Agreement, the dispute shall be resolved by an arbitrator under the rules of the American Arbitration Association.

Arbitration has some advantages to it. It's cheaper and much faster than going to court. And if you have a strong claim and strong proof, there's a good chance you could represent yourself and do it without a lawyer. (Although it would be smart to run the case past a lawyer you trust to give you a straight answer, to see whether hiring a lawyer will help your chances.)

But the downside to arbitration can be huge.

If you are up against a big company, you will likely have a hard time getting an unbiased arbitrator. Study after study shows that arbitrators favor larger companies over small businesses, employees, or consumers, since they want to their return business.

Even worse, if you lose your arbitration, the chances that you can get the decision overturned are overwhelmingly against you.

So if you want to avoid arbitration, your best bet is not to agree to it in the first place.

Up until a few years ago, there were all kinds of ways you could be forced into arbitration. They'd bury the words in small print and dense English that few would take the time to read. Or the contract would be one that people simply could not refuse, for one reason or another.

But lately, courts and agencies have been much more helpful in letting people avoid getting trapped into arbitration.

Recently, an Uber customer was able to get out of arbitration when an influential New York judge scorned the way Uber manipulated the customer into "agreeing" to arbitration.

In Meyer v. Kalanik, a customer accused Uber of colluding with its drivers to keep prices high. This would constitute a classic violation of the Sherman Antitrust Act, but Uber tried to keep the case out of court by pointing to a lengthy and dense arbitration clause.

But Judge Jed S. Rakoff, one of the most famous federal trial judges alive, pointed out that the arbitration clause is out of sync with the way the Internet age actually works.

When he signed up for Uber, Meyer pulled up the Uber agreement on his Samsung Galaxy smartphone, and clicked on Terms and Conditions.

The arbitration clause was barely legible, Judge Rakoff noted. Worse, customers like Meyer had no realistic power to negotiate the terms of that contract, and was clearly not even aware of them, he said.

Since he did not know of the terms, he could not have agreed to them, and so the arbitration clause could not be held against him, Judge Rakoff wrote.

Judge Rakoff's opinion will have plenty of persuasive power in similar cases around the country. Customers who feel trapped by their arbitration agreements now may have a way out.